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Constructing Clear Disclosures: 7th Edition of “SEC Comment Letters”

The seventh edition of SEC Comment Letters—Including Industry Insights: Constructing Clear Disclosures offers Deloitte’s perspective on the topics the SEC staff focuses on in its comment letters to registrants. In addition to extracts of letters and links to relevant related resources, the latest edition contains analysis of staff comments to help registrants understand trends and improve their financial statements and disclosures, as discussed by Bob Uhl, Accounting Standards and Communications, and Christine Davine, SEC Services, both partners of Deloitte & Touche LLP. The new edition covers a wide range of financial statement accounting and disclosure topics, with examples of SEC comments, as well as a number of industry-specific topics, including sections devoted to the consumer and industrial products, energy, health sciences and financial services sectors. The latest issue also has added coverage of comment trends regarding emerging growth companies and initial public offerings.

Over the past year, the staff has continued to address virtually all topics discussed in Deloitte’s sixth edition, and it remains focused on the clarity of registrants’ disclosures. Sections in the seventh edition have been updated to reflect newer comments on registrants’ financial statements and other areas of their filings.

In 2013, the SEC underwent many leadership changes with the appointment of three new commissioners (including a second new chairman, Mary Jo White, to replace Elisse Walter), two co-directors of the SEC’s Division of Enforcement and a new director of the SEC’s Division of Corporation Finance. As a former federal prosecutor, Ms. White has indicated that one of her primary initiatives will be to aggressively pursue enforcement activities, including obtaining admissions of wrongdoing in settlements of the most egregious cases, investigating minor violations, pursuing individual offenders and increasing the staff’s focus on accounting-related fraud. The recently formed Financial Reporting and Audit Task Force will use technology-based tools such as its Accounting Quality Model to analyze electronic data—potentially including XBRL tags—for accounting anomalies, possible fraud and other “outlier” information.

Areas of Focus

Throughout 2013, another of Ms. White’s priorities—completing the SEC’s ongoing rulemaking commitments, particularly under the Dodd-Frank and the JOBS* Acts—dominated the Commission’s agenda. Under the Dodd-Frank Act, the SEC issued proposed rules on CEO compensation ratio disclosures and credit risk retention. In addition, the SEC staff released various FAQs related to the SEC’s final rule on conflict minerals. Under the JOBS Act, the SEC recently issued a proposed rule that would permit eligible companies to use “crowdfunding,” which is a method of raising capital through the Internet, typically by soliciting small individual contributions from a large number of people; and it is reviewing disclosure requirements to consider how to simplify and modernize SEC rules and regulations.

Continuing to operate during the government shutdown in October 2013, the SEC has also been busy with money market fund reform and cross-border issues related to derivatives and swaps. However, the SEC has not yet communicated a decision about whether, and if so, how, to adopt IFRSs in the U.S. financial reporting system.

About half of all issuers’ filings continue to be reviewed by the SEC’s Division of Corporation Finance annually, and its comments have emphasized the need for greater clarity in registrants’ disclosures. MD&A remains the leading source of comments. Other subjects of frequent SEC staff comment include revenue recognition, income taxes, loss contingencies, business combinations and intangible assets, segments, fair value measurements, non-GAAP measures and risk factors.

The SEC staff continues to issue substantial industry-specific comments. For example, comments related to the pharmaceutical and life sciences industry have focused on understanding how registrants accounted for collaboration agreements and other revenue recognition matters. In addition, financial services industry registrants have been asked about disclosures related to the credit quality of their assets—including eurozone debt holdings, fair value, real estate acquisitions and captive insurance arrangements.

The SEC staff’s filing reviews have centered heavily on MD&A (as they did last year), and the staff has encouraged registrants to “tell their story” in MD&A. In results of operations, the staff has focused on encouraging registrants to disclose known trends or uncertainties and to quantify components of overall changes in financial statement line items and enhance their analysis of the underlying factors that cause such changes. Registrants should also consider early-warning disclosures that give investors insight into when charges may be incurred in the future, regardless of whether such charges are related to (1) contingencies, (2) goodwill or other long-lived asset impairments, (3) the settlement of uncertain tax positions or (4) the recognition or release of a valuation allowance. The SEC staff’s comments to registrants have also concentrated on disclosing various key risks in MD&A and the risk factors section, including risks related to cybersecurity and cyber incidents, as well as those related to transactions with countries denoted as sponsors of state terrorism.

Other SEC staff comments to registrants have highlighted topics associated with the current economic environment, including goodwill and other long-lived assets, the realizability of deferred tax assets and fair value disclosures. New fair value disclosure requirements have been in effect for a little more than a year, and staff reviews have therefore focused on whether registrants have disclosed more granular, disaggregated and qualitative sensitivity information related to unobservable inputs. In addition, the SEC staff continues to emphasize segment disclosures, particularly when a registrant has aggregated operating segments in determining its reportable segments. Completeness and consistency of disclosures about revenue recognition policies, accounting for multiple-element arrangements, and principal versus agent analysis (i.e., gross or net reporting) also remain key topics of comment. As it has done with respect to other new accounting standards, the SEC staff is expected to focus on the implementation of the proposed joint FASB and IASB revenue recognition standard once it is finalized—which the boards currently project will be in the first half of 2014.

The appendices in the seventh edition offer additional insights. For example, Appendix A summarizes the FASB’s recently issued Accounting Standards Updates and current projects. Appendix B gives a glimpse into the SEC staff’s review and comment letter process. Appendix C discusses best practices for managing unresolved SEC comment letters and Appendix D provides helpful tips on searching the SEC’s EDGAR database for comment letters. In addition, Appendix E lists the titles (or links to titles) of the standards referred to in this publication, and Appendix F defines the abbreviations used.

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